Geopolitical Developments: The Russian Bear Advances And Western Comeuppance Will Not Be Far Behind

News from the UK that Russia is advancing through eastern Ukraine causes dread in the West, as morale among Ukrainian troops likely sags and leads to deeper advances and consequent suffering, while the global consumer reels from food inflation and shortages. The latter is exerting a token impact on financial markets, which are largely accepting the war as the new normal and looking ahead to global economic growth as most of the world opens up from pandemic restrictions.The volatility risk premium points to a higher market over the next few days (though volume may be light since the VRP could easily reverse and catch investors offside), while my technical reading of key stocks in the S&P 500 is bullish. Yesterday's cross-asset action brought one positive factor for US stocks. Copper's chart is signifying global growth. But there was also one negative factor across global asset classes. Oil is pointing to stagflationary conditions. Expect the S&P 500 to rise modestly over the next few days before beginning a new leg lower as we approach mid-June.

The real outcome of Russian advances is the status quo becomes entrenched, since Russia likely lacks the ability to hold its gains due to both military and economic pressures. The National Interest notes “The Russian military is well-suited to short, high-intensity campaigns defined by a heavy use of artillery. By contrast, it is poorly designed for a sustained occupation, or a grinding war of attrition, that would require a large share of Russia’s ground forces, which is exactly the conflict it has found itself in. The Russian military doesn’t have the numbers available to easily adjust or to rotate forces if a substantial amount of combat power gets tied down in a war... In practice, this means that many Russian motorized rifle squads only have enough soldiers to operate their vehicles, but not to dismount and fight on foot... Indeed, the high number of regimental and brigade commanders who have been killed in Ukraine is one indication that Russian units are fighting as regiments or brigades and not necessarily with independent battalion tactical groups... The longer this war continues, the greater the disruptive effects will be on training and recruitment. “

The simple truth is the war will go on indefinitely because the real issue is Europe and America dithering on how to help Ukraine, out of fear Putin will go off the rails. Persistent rumors of Putin’s poor health should give the West confidence to call his bluff, and force the war to come to a close. If instead Western leaders stand up for their consumers of fossil fuel-based products instead of the cause of liberty against evil, then such evil will persist. Looking across India, Turkey, Mexico and elsewhere, there are plenty of autocrats across the democratic world to take up the cause of nationalistic chauvinism that Putin exemplifies. This spells not only moral disaster but eventual comeuppance to the global economy.

We can see this playing out as financial markets anxiously watch corporate profit growth fall while timidly predicting global growth stays positive. But would the global consumer continue to spend knowing that Russia will menace both Ukraine and the fossil-fuel based economy because the West won’t stand up to it? I see the only prudent answer to be a bet that the global consumer will hold up in a fragile way, with the risks all to the downside because there are too many reasons not to be confident in the future. That translates into lower valuations to compensate investors for this macro risk. Consequently I see the S&P 500 falling to 3700 this month and likely bottoming at that level.

My current positions include a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETF UPRO.